General

Tackling inequality

It may be true that money can’t buy you happiness, but this only applies if you have enough money to meet your basic needs – a home, food, clothes for your family, education for your children. What happens when that basic equation breaks down and millions see no hope of improving their lot?

“There is always inequality in life…. Life is unfair” so said John F. Kennedy almost 50 years ago. The real question is how much inequality is acceptable for our economies and societies, which has again come to the fore in the current crisis.

When 200 million people worldwide are out of a job, youth unemployment is at record levels in some countries and governments are tightening the reins on public spending, people’s attention perhaps naturally turns to the question of whether they have the opportunities to improve their lives.

The social cohesion of our democratic societies is built around the premise that there are checks and balances to prevent the gap between rich and poor becoming so wide that people question the whole basis of a system that leaves large numbers in poverty.

Without a thriving middle class earning the money to pay taxes, provide for their families and save for their retirement, governments will see public coffers emptying and their economies faltering.

One element of the sustained economic growth in the pre-crisis decade which came as a surprise was that increased growth did not benefit everyone – the rich got richer than before compared to both low and middle-income people.

But increasing inequality penalises everyone, as Richard Wilkinson and Kate Pickett argue in their book The Spirit Level – the narrower the gap between rich and poor in a society, the better off everyone in that country is in terms of elements such as health, compared with societies where the gap is wider.

And chances of improving your lot are lower where income inequality is greater, while there is a better chance of children doing better than their parents in more equal societies.

There is also evidence that strong growth in emerging and developing countries in recent years which have raised living standards have not necessarily made people happier, at least partly due to growing inequality and high youth unemployment.

Social mobility – the prospect of having a better life than your parents – is a strong motivation for young people to commit to education and to work hard. But when high youth unemployment limits the chances of finding a job, and widening inequality saps the chances of upward mobility, there is a risk of young people becoming disillusioned and angry. Not to mention their parents, who may have made sacrifices to ensure a good education for their children in the belief it would bring them a better life.

Interview with Sharon Kelly in Dublin at OECD LEED conference in October, talking about marginalised young people, risks of falling into poverty or out of middle class.

Growing demand for social cohesion comes from a rapidly expanding middle class. Their rising expectations, desire and ability to participate in civic activities and aspirations for better standards of living are a driving force for change. Today almost half of the global middle class – 1 billion people – live in fast-growing emerging-market economies. And this number is projected to almost quadruple to 3.9 billion in 2030.

How can governments address inequality? In countries where growth is strong, they could invest their resources in social development through better health care, education, social protection and other services. This in turn helps people value their relationship with the state and the public service, making public policies more effective.

This recipe may work for the emerging and developing world, but what of the OECD countries? Is inequality still growing, and what can governments do about it? A new OECD report, Divided We Stand: Why Inequality Keeps Rising, (to be released on 5 December) has some answers.

“Social cohesion – the glue that holds society together – is at risk worldwide (…). There is ample room for government action to meet a growing demand for social cohesion in developing countries and emerging-market economies,”